ECB's Draghi in Hot Seat Next Week

ECB press conference February 9. ECB head Mario Draghi will again be in the hot seat next Thursday, during what would normally be a routine meeting of the ECB's Governing Council.

But nothing is normal anymore at the ECB.

Draghi will announce whether there will be a cut in the 1 percent refi rate (unlikely), but more important will be any commentary on his stance on the Greek debt the ECB is holding.

This is THE hot potato in Europe right now.

Euro-zone finance ministers are supposed to meet next week to sign off on the new Greek bailout, except the numbers keep moving:

1) a 130 billion euro bailout package is now looking more like 145 billion or more,

2) the 50 percent haircut for private sector involvement (PSI) debt is now over 70 percent but still not fixed,

3) reductions in the minimum wage and pensions are still not settled.

Where does Draghi and the ECB come in? Get used to a new acronym: OSI, for Official Sector Involvement. The IMF is already arguing that cutting Greek debt from just the private sector (PSI) is not enough to get the debt-to-GDP ratio down to the 120 percent target by 2020, and that the face value of Greek debt that the ECB holds (OSI) should also be cut.

This is a legal problem for the ECB, because it would be a form of financing for states, which they are not allowed to do.

Here's the bottom line:Greece's bailout money is at least partially tied to the PSI and, now, to the OSI. This again puts ECB head Mario Draghi in a difficult position.

On Thursday, he will be questioned on where he stands on a haircut on his Greek holdings. He has dodged the question so far. He may not be able to for long.

So there are various workaround papers floating around: take the interest payments from the bonds and give them to Greece (creative!), or sell the bonds to the European Financial Stability Facility (EFSF).

If there is no deal on the PSI by the ECB press conference on Thursday, then Draghi will be less likely to comment. If there is a PSI deal, then he will have to adopt a clearer position.